This process is commonly called Factoring and has been used since Roman times and is used today by some of the largest companies in the world. Until recently it was mainly available to very large companies who dealt in huge dollar amounts, like American Express.
Today this service is available to almost every business that provides a service or product to another business or to a government entity. Key to the factoring of accounts receivable is the fact that funds become available at the point of sale.
Unlike bank financing, factoring is easy to set up and does not require extensive prerequisites. With factoring you do not tie up your assets as collateral and you do not have to take out a loan.
In many situations, factoring is more appropriate for your business than bank financing. Factoring has the following characteristics:
- It is based only on your accounts receivable. Your ability to raise cash by factoring is based on just the accounts receivable of the business, rather than on traditional measures of your financial strength and stability.
- Provides your business with continuing cash flow without the requirement of periodic payments or interim payoffs. New sales by your business continuously create new power to obtain cash and your business does not have to deal with the renewal of loans or worry about maturity dates.
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